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For Ontarians looking to get a mortgage, the major banks are often out of reach and inaccessible to many who face circumstances that make them less than ideal borrowers. This could be from having a bad credit score or from a non-traditional income source, but it’s now becoming increasingly common for one reason to be out of a borrower’s control. That reason is housing prices.

The average price of a home in Ontario has skyrocketed over the past year, with the average price in the province now at $866,000 as of May 2021. That’s a 37.6% annual increase over prices seen one year ago, which puts Ontario’s home price growth well above annual increases seen in other provinces.

Ontario’s expensive housing prices are a particularly large problem in the Toronto area, where the average house price is now well over $1 million. Some municipalities, such as Oakville and Caledon, have average home prices over $1.4 million. This makes buying a house unaffordable for many Ontarians.

What do private mortgage lenders do?

Private mortgage lenders are an alternative to the major banks, offering mortgages to those that wouldn’t be approved for one with a bank. Getting a private mortgage in Ontario can sometimes be as simple as only requiring you to have some level of equity or down payment in your home, no matter your credit score or income. This means that you are almost guaranteed to be able to get a private mortgage if you have home equity, although whether or not the private mortgage rate offered to you would be acceptable would be another matter.

Most private lenders can only be accessed through mortgage brokers. That’s because Ontario’s Mortgage Brokerages, Lenders and Administrators Act only allows private lenders to operate through licensed brokerages. In 2017, there was $10.6 billion in private mortgage transactions at mortgage brokerages, making up 8% of all transactions made by brokerages.

Are private lenders a good thing?

Private mortgage lenders fill a much needed gap in the mortgage industry by having an alternative to the major banks. While it may seem like borrowers of private mortgages would only be those that banks think would be too risky to touch, or that private lenders only lend to those that can’t afford a mortgage, that’s increasingly not the case.

A main selling point that private lenders have is that borrowers can skip the mortgage stress test. Banks and other federal financial institutions are required to conduct a stress test for mortgage applicants to see if a borrower will be able to afford their mortgage, and if they can afford their mortgage if mortgage rates rise. Private lenders are unregulated, which means that they don’t have to follow this rule. This allows more borrowers to be able to qualify for a mortgage, and for those who may already qualify at a major bank, they can borrow a larger amount with a private lender. Private mortgages are also short-term in nature, which means that they can be used temporarily to bridge the gap in the meantime while borrowers get their finances in order.

The mortgage stress test is needed whenever you switch lenders or refinance your mortgage in addition to new mortgage applications. Failing the stress test means that you absolutely cannot get a new mortgage at a bank, with no exceptions, such as by having debt service ratios being over the maximum allowed limits.

Should Ontarians choose private mortgages?

In Ontario’s red-hot housing market with prices rising across the board, more and more Ontarians are forced to get a larger mortgage. This affects their debt service ratio calculations, as their mortgage payment will now be larger, and makes it harder to get a mortgage.

If there were no private and alternative lenders, then failing the stress test would mean that you won’t be able to get a mortgage at all. If you were looking to purchase a home, then that means that you won’t be able to get the financing that you need. If you currently have a mortgage, then you won’t be able to refinance or switch to another lender.

For some Ontarians, a private mortgage isn’t just their choice of last-resort, but rather it can be their only choice. This is especially true for those with a recent bankruptcy or borrowers looking to get a mortgage well over the limits allowed by the banks. For example, a homeowner might be looking to borrow money for home improvements, but they failed the stress test and so they won’t be able to refinance their mortgage. Instead, they can borrow from a private mortgage lender.

The main risk for private mortgage borrowers is housing prices. Most Ontarians looking to get a private mortgage plan on switching back to a traditional lender once their term is over. Borrowing at a higher loan-to-value ratio (LTV) means that a small decrease in your home price can make your mortgage be more than what your home is worth. This can make it very difficult to qualify for a traditional mortgage if housing prices decline, meaning that borrowers might be stuck at a private lender with higher mortgage rates.

Yet, as home prices continue to increase, more and more Ontarians will be pushed out of the traditional mortgage marketplace and will instead rely on private mortgage lenders. Private lenders are ready to fill this gap, and private mortgages can be a powerful temporary tool for borrowers to use.

Guest Post – Mackey Wallace